Bond supply expectations and the term structure of interest rates

Monica Billio, F. Busetto, Alfonso Dufour and S. Varotto

Journal of International Money and Finance, 2025, vol. 150, issue C

Abstract: This paper investigates the influence of forward-looking government bond supply information on changes in the term structure of interest rates. While traditional arbitrage-free models suggest that bond supply should not impact bond yields, models accounting for preferred-habitat investors and imperfect asset substitutability raise this possibility. By analysing debt supply expectations derived from Germany's Treasury press releases, we find that news about expected bond supply affects bond yields, supporting the notion that supply expectations influence current interest rates. Our study also extends macro-finance models, highlighting the significant role of supply expectations in term structure dynamics. Additionally, we provide insights into the puzzle of German government bond yields falling below the ECB deposit rate.

Keywords: Expected supply; Quantitative easing; Term structure; Interest rates; Government bonds (search for similar items in EconPapers)
JEL-codes: E41 E43 E51 E52 E58 G01 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:150:y:2025:i:c:s0261560624002043

DOI: 10.1016/j.jimonfin.2024.103217

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